The Dow has fallen close to 5% since its all time high at the end of the year, dropping in part on fears that China’s growth is slowing and amid signs of more economic woes in emerging markets. There was stringer manufacturing data in Europe, where Greece’s factory sector was shown to have finally returned to growth for the first time in more than four years, fuelling hopes that the country’s long slump could be easing. The news of rising orders and activity for Greece’s manufacturers came amid evidence of a manufacturing recovery continuing in much of the eurozone.
We have heard these news about a European recovery several times recently, and previously it has turned out to be a macroeconomic henhouse made out of a feather. To check whether or not this is true this time, let us review some Eurostat national accounts data.
Since we do not yet have annual numbers for the European economies for 2013, quarterly data will have to do. That is not a bad idea, though, because if calibrated correctly they can give us a fine-tuned picture of what is happening on the ground. Thus, using quarterly national accounts data, adjusted for inflation, we find the following:
1. GDP growth in the 28 member states of the EU together was 0.4 percent in the third quarter of 2013 over the third quarter of 2012. This is the first positive growth number since the first quarter of 2012 (0.7 percent) which is worth noticing. At the same time, the euro zone exhibited zero growth in the third quarter of last year, admittedly an improvement over five straight quarters with shrinking GDP but hardly anything to write home about. The difference between the two growth rates suggests that it is better to stay out of the euro zone than to be part of it. Sure enough, if we isolate growth rates for the third quarter of 2013 (again over third quarter 2012) we find that out of the eleven EU member states that have a growth rate in excess of one percent, only three – Germany, Ireland and Luxembourg – are part of the euro zone. For example, the British economy outgrew the German, if only by a tenth of a percent. The explanation of this is most likely that the EU-ECB-IMF troika has targeted euro-zone countries for harsh austerity measures, allowing the non-euro EU states to more or less escape the tough fiscal repression. Greece is a good example, with a GDP growth rate of -3.0 percent. A positive side to this number is that it is the smallest quarterly GDP contraction in at least two years, but it also means that all talk about the Greek economy being in a recovery phase is nonsense.
2. Eurostat does not compile data on household consumption in the form of year-to-year quarterly consumption growth. However, they do report it for 23 member states. Of those, seven report a growth rate of one percent or more, while nine report shrinking private consumption. The unweighted average growth rate is 0.5 percent, which goes well with the GDP growth rate in the EU-28 (in normally functioning economies private consumption is the single largest contributor to GDP). Again looking at Greece, it ranks lowest of the 23 with consumption contracting 3.9 percent in the third quarter of 2013 over the same quarter 2012. Again, this is better than previous quarters: we have to go back to the third quarter of 2011 to find a less depressing figure (-2.5 percent). This is of course a good sign in itself, and we could add that the contraction rate fell throughout 2013 (with fourth-quarter numbers still not reported). That said, we could be looking at the same type of temporary relief as the third quarter of 2011 delivered: the first and second quarters of that year saw major contraction rates in private consumption (-12.3 and -6.5 percent, respectively). I don’t think that is the case, because overall it seems like the European economy in general, and the Greek economy in particular, are leaving the depression phase they have been in over the past few years. That, however, does not mean that they are heading for a recovery – far more likely is that we are witnessing the emergence of long-term economic stagnation.
3. Now for the manufacturing numbers. EU-28 saw a 0.4 percent growth rate in the third quarter of 2013, with the euro zone at 0.1 percent. With Eurostat figures from 24 of the 28 EU states we can conclude that there are vast differences between individual member states. Six states saw manufacturing grow at more than two percent; another eight experienced a growth rate of zero to one percent. In ten states manufacturing declined, led by Cyprus (-5.4 percent), Croatia (-5.4) and – yes – Greece (-5.2). Admittedly, one quarter figure does not a full story make, but the Greek situation does not improve much if we look back through the past few quarters. Before the significant decline in the third quarter, Greece saw four straight quarters of growing manufacturing. The average for those quarters was 2.3 percent, which does not compare well to the nine percent quarterly average loss in the four quarters prior to that growth period. In other words, while there has been some comeback for Greek manufacturing since early 2012, the nosedive in the third quarter shows that it is far too early to draw any definitive conclusions.
More than being a sign of a recovery, these Eurostat numbers reinforce the point I have made earlier that the Greek economy is transitioning from depression to stagnation. The same is true for the rest of Europe.
Beyond that, it is interesting to note the emerging difference between the euro-zone countries and members of the EU that still maintain their own currencies. Again, the better performance in non-euro EU states is probably not related to exchange-rate fluctuations benefitting foreign trade, the difference. Instead, it is a matter of austerity enforcement: the ECB obviously has no direct influence over non-euro states, which leaves the fiscal policy in somewhat better shape there.